By April 30, 2016, a profit sharing or 401(k) plan that uses an IRS pre-approved document must be restated to maintain its qualified status. A plan that is “qualified” is granted special tax benefits under the Internal Revenue Code. The company may deduct its contribution to the plan in the year that it is made, the company does not pay tax on the dividends or interest earned by the plan’s assets, and plan participants do not pay income tax on their accounts until distribution. A retirement plan is tax “qualified” if its terms are consistent with current law and it is operated in accordance with its terms and the law.
These IRS pre-approved documents are usually supplied by the company’s recordkeeper or financial advisor, and include the caveat that the company should review the document with its legal advisor. Prudent plan fiduciaries will ask their ERISA attorney to review the proposed restatement for terms consistent with the current document, and for suggestions of changes that may simplify plan administration. In addition, a discussion regarding the plan’s definition of compensation and its eligibility and vesting rules may provide assurance that the terms of the restatement reflect actual plan operations. If plan provisions do not reflect operations, an attorney can suggest IRS approved correction procedures that can be followed so to ensure that the plan remains qualified.
For more information, please contact Deb Grace in our Troy, Michigan office at 248-433-7217.